Chapter 11 Accounting 5303
common stock:
a type of capital stock that possesses the basic rights of ownership, including the right to vote. represents the residual element of ownership in a corporation.
dividends
distribution of assets (usually cash) by a corporation to its stockholders. normally viewed as a distribution of profits, dividends cannot exceed the amount of retained earnings. must be formally declared by the board of directors and distributed on a per share basis NOTE: stockholders cannot simply withdraw assets from a corporation at will.
book value per share:
The stockholders equity represented by each share of common stock, computed by dividing common stockhodler's equity by the number of common shares oustanding
t/f: Some preferred stocks grant the holder the right to relinquish the stock in exchange for common stock of the same company
True
stock transfer agent
a bank or trust company retained by a corporation to mantain its records of capital stock ownership and make transfers from one investor to another.
A company has stockholder's equity of $400,000 and $450,000 at the beginning and the end of the current year, respectively. The company's net income for the tear was $51,000. What was the return on equity for the year?
%12 (Average stockholder's equity = 400,000 = 450,000/2 = 425,000. Return on assets = 51,000/425,000 = 12%
a stockholder holds 8000 shares of common stock in a company that has 100,000 shares outstanding stock with a current market value of 150. The company distributes a 2 for 1 stock split. The stockholder will now hold ________ shares with an approximate per share value of $ ____.
1600 shares (8000 x 2 = 16000) $75 ( 150/2 = $75)
A company has 10,000 shares of 5% cumulative preferred stock outstanding that has a $100 par value. Dividends are in arrears for 2 prior years. Preferred stockholders must recieve a total of $ _______ in dividends before common stockholders can recieve any dividends
150,000 ( $100 x .05 x 10,000 x 3)
A company has 10,000 shares of $100 par value, 5% preferred stock outstanding and 100,000 shares of $10 par value common stock outstanding. What is the total dividend that must be paid for common stock to recieve $1 per share?
150,000 (($100 x .05) x 10,000) + (100,000 x $1) = 150,000
A company has the following stock outstanding: 100,000 shares outstanding: 100,000 shares of $10 par value common stock and 10,000 shares of $50 par value, 6% cumulative preferred stock, 1 year's dividends in arrears. How much must the total dividend declared by the board of directors be to both the preferred and common stock for common stock to recieve $1 per share?
160,000 ($50 x.06 x 10,000 x2) + (100,000 x $1) = 160,000
A company's book value per share is $12. It has 10,000 shares of $10 par value common stock outstanding and no additional paid in capital. The company's retained earnings are $_____
20,000 ( $12 x 10,000) - (10,000- $10) = 20,000
A company sold 7000 shares of 100 par value stock at 150 per share. What is the amount of additional paid in capital recognized in this transaction?
350,000
A company sold 1000 shares of treasury stock for $45 per share that it had purchased for $40 a share. The stock has a par value of 30 and originally sold for $32. The additional paid-in capital that results from the resale of the treasury stock is:
5,000 ( 1000 shares x (45 -40) = $5000)
A company has 500,000 shares of $10 par value common stock outstanding, which originally sold for $12. It purchases as treasury stock 10,000 shares at the current market price of $50. Retained earnings total 750,000. What is the company's total stockholder's equity after the treasury stock purchase?
6.25 million ( 500k shares x $12 ) + $750k - (10k shares x $50 ) = 6.25
A company has 50,000 shares of 5%, $100 par value preferred stock outstanding, which is cumulative. It also has outstanding 100,000 shares of $10 par value common stock. Dividends have not been paid for the past 2 years. This year, the board of directors wants to pay common stock a $2 dividend per share. The total amount the board must declare in order to meet the board's dividend objective for common stock is $ _____.
950,000 ($100 x .05 x 50,000 x 3) + (100,000 x $2) = 950,000
A company has outstanding preferred stock with a %5 dividend rate. The interest rate on debt when the preferred stock was issued was 3%. Today, the interest rate is 7%. What impact would you expect this to have on the market value of the preferred stock?
A decrease in the market value of the preferred stock.
Additional Paid in Capital:
An acount showing the amounts invested in a corporation by stockholders in excess of par value or stated value. In short, this account shoes paid in cpaital in excess of legal capital.
The officer whose daily responsibilities relate most directly to the accounting function of business operations is...
Chief financial officer
On april 16, 2018, rodriguez corporation reqcquired 12000 shares of its own $10 par stock for $660,000 cash. On november 4, 2019, 1000 of the treasury shares were reissued at a price of $65 per share. The journal entry to record the reissuance of the 1000 shares of stock on November 4 includes `
Credit to additional paid in capital: treasury stock transactions of 10,000
t/f: treasury stock transactions may give rise to gains and losses that are included in the company's income statement
False (These amounts are adjustments to paid in capital, not gains and losses in the income statement)
When a business is organized as a corporation, what is true?
Fluctuations in the market value of outstanding shares of capital stock do not directly affect the amount of stockholders equity shown in the balance sheet
What is correct regarding the relationship between the book value and the market value of common stock?
The book value may be useful in evaluating the reasonableness of the market value and the relationship between the book value and the market value is one measure of investors' confidence in a company's management.
stock split
an increase in the number of shares outstanding with a corresponding decrease in par value per share. the additional shares are distributed proportionately to all common shareholders. the purpose of a stock split is to reduce market price per share and encourage wider public ownership of the company's stock. for example, a 2 for 1 stock split will give each stockholder twice as many shares as perviously owned.
stock registrar
an independent fiscal agent, such as a bank, retained by a corporation to provide assurance against overissuance of stock certificates
underwriter
an investment banking firm that handles the sale of a corporations stock to the public
publicly owned corporation
any corporation whose shares are offered for sale to the general public.
On December 10, 2017, smitty corporation reacquired 2,000 shares of its own $5 par value common stock at a price of $60 per share. in 2018, 500 of the treasury shares are reissued at a price of $70 per share. Which of the following statements is correct?
b. The two treasury stock transactions result in an overall net reducation in Smitty stockholder's equity of 85,000 ((2000 x $60) - (500 x $70)
a primary disadvantage of the corporate form of orgnanization is:
corporate earnings are subject to double taxation
Morgan Moving Corporation was organized with authroixation to ussye 100,000 shares of $1 par value common stock. Forty thousand shares were issued to Tom Morgan, the company's founder, at a price of $5 per share. No other shares have yet been ussed. Which of the following statements is true?
in the balance sheet, the additional paid in capital account will have a 160,000 balance, regardlss of the profits earned or losses incurred since the corporation was organized
the financial statements of a corporation that failed during the current year to pay any dividends on its cumulative preferred stock should:
include a footnote disclosing the amount of hte dividends in arrears.
public information
information that, by law, mut me made available to the general public, indlues the quarterly and annual financial statements - and other financial information - about publicly owned corporations.
what is a reason why businesses incorporate?
limited shareholder liability, transferability of ownership
The price at which shares of stock are sold from one investor to another represents the ____ value of the shares
market
when shares of stock are sold from one investor to another, they will trade at;
market value
Shares of stock that have been issued and are in the hands of the stockholders are called ___ shares.
outstanding
board of directors
persons elected by common stockholders to direct the affairs of a corporation.
A corporation whose stock is traded through organized securities exchanged is said to be ___ owned
publicly
the par value of the common stock of a large listed corporation:
represents legal capital and is not related to the market price of the stock
Treasury stock
shares of a corporations stock that have been issued and reaquired, but not canceled. may be held indefinitely or may be issued again at any time. Account is debited for the cost of the shares purchsed, not their par value.
treasury stock
shares of a corporations stock that have been issued and then reaquired, but not canceled
if preferred stock is convertible, it is so at the option of the:
stockholders
legal capital
equal to the par value or stated value of capital stock issued. this amont represents
Common stockholders have which of the following rights?
To residual claims on assets if the copmany is liquidated, to vote at stockholders meetings, to participate in dividends when declared by the board of directors.
corporation
a busiensss organized as a legal entity seperate from its owners. chartered by the state with ownership divided into shares of transferable stock.
Corporation
a business organized as a legal entity seperate from its owners. Chartered by the state with ownership divided into shares of transferable stock. Stockholders are not liable for debts of the corporation. The assets of a corporation belong to the corporation itself, not to the stockholders.
preferred stock
a class of capital stock usually having preferences as to dividends and in the distribution of assets in the event of liquidation.
closely held corporation
a corporation owned by a small group of stockholders. not publicy owned
stock certificate
a document issued by a corporation (or its transfer agent) as evidence of the ownership of the number of shares stated on the certificate
stockholders subsidary ledger
a record showing the number of shares owned by each stockholder
transactions between a corporation and its stockholders are classified in the statement of cash flows as ____ activities.
financing
As evidence of a stockholder's ownership, each stockholder receives from the corporation a ___ ___ that indicates the number of shares he or she owns.
stock certificate
owners of a corporation are called _____
stockholders or shareholders
what is not reasons why businesses incorporate?
the ability to avoid paying taxes
paid in capital
the amounds invested in a corporation by its stockholders
dividend yield
the annual dividend paid on a share of stock, expressed as a percentage of the stock's market value. indicates the rate of return represented by the dividend.
Tri state electric is a profitable utility company that has increased its divdend to common stockholders every year for 42 consecutive years. which of the following is least likely to affect the market price of the company's preferred stock by a signifcant amount?
the board of directors announces its intention to increase common stock dividends in the current year.
limited personal liability:
the concept that the owners of a corporation are not personally liable for the debts of a business. Thus stockholders potential financial losses are limited to the amount of their equity investment.
retained earnings
the element of owner's equity in a corporation that has accumulated throuhg business operations. net income increases retained earnings; net losses and divdends reduce retained earnings.
double taxation
the fact that corporate income is taxed to the corporation when earned and then again taxed to the stockholders when distributed as dividends.
a disadvantage of the corporation form of business organization is:
the high cost of formation
par value (stated value)
the legal capital of a corporation. Represents the minimum amount per share invested in the corporation by its owners and cannot be withdrawn excpt by special legal action.
What is true about the market value of common stock?
the level of risk that the investor takes on is important in determining the market value of common stock, the profitability of the company is important in determining the market value of common stock, investor expectations are important in determining the market value of common stock
stockholders
the owners of a corporation. the name reflects the fact that their ownership is evidenced by transferable shares of capital stock
what are characteristic of common stock of a large publicly owned corporation?
the shares may be transferred from one investor to another without disrupting the continuity of business operations, voting rights in the election of the board of directors, after issuance, the market value of the stock is unrelated to its par value.
state of incorporation
the state in which the corporation is legally formed. this may or may not be the state in which teh corporation conducts most or any of its business.
contributed capital
the stockholders equity that results from capital contributions by investorsin exchange for shares of common or preferred stock. also referred to as paid in capital.
regarding the corporate form of business organization:
they are responsible for own taxes, recognized under law as a seperate legal entity, responsible for own debts.
which are rights of stockholders
to participate in dividends declared, to share in the distibution of assets if the corporation is liquidated, to voye for directors and on key issues.
capital stock
transferable units of ownership in a corporation. A broad term that can refer to common stock, preffered stock, or both.
the rights of a common stockholder include
vote for directors, to share in profits when the board of directors declares a dividend, to recieve a proportionate share of c